ASPE VS. IFRS: THE BASICS

Presenters:Leanne Mongiat, CATrudy Snooks, CAAdams & Miles LLP

Although the presentation and related materials have been carefully prepared, neither the presentation authors, firm, nor any persons involved in the preparation and/or instruction of the materials accepts any legal responsibility for its contents or for any consequences arising from its use.

A disclaimer before we begin...

Session OverviewCrash course in ASPE: The BasicsCrash course in IFRS: The Very BasicsKey differences:

Property, Plant and EquipmentLeasesRelated party transactions Income taxes payableFinancial Instruments

Example disclosuresTransition differencesThe Right Option for Your CompanyClosing and Questions

Crash Course in ASPEFor year-ends beginning on or after January 1,

2011Reminder re: effective date vs. transition date

Handbook – located in Part IIRetrospective - is applying a new accounting

policy to transactions, other events and conditions as if that policy had always been applied

ASPE Affects:• Fair value• Prepaids• Asset retirement obligations (ARO)• Election for Property, Plant & Equipment• Intangibles• Employee future benefits• Stock-based compensation• Business combinations and Joint Ventures• Goodwill• Government payables• Income taxes• Opening balance sheet• Cash flow statements

IFRS AffectsRevenue recognitionAsset impairmentProperty, Plant and

EquipmentFinancial InstrumentsInvestment propertyForeign ExchangeProvisionsLeasesIntangible AssetsRelated Party Transactions

Business CombinationsEmployee future benefitsIncome taxesStock based compensationHedgingMining, Oil & Gas

CompaniesJoint VenturesConsolidationsEarnings Per ShareOpening balance sheet

Crash Course in IFRSFor year-ends beginning on or after January 1,

2011

Reminder re: effective date vs. transition date

Entities with rate regulated activities have the option to defer changeover to January 1, 2012

Handbook – located in Part I

Both private companies and Not-For-Profit organizations have the option to adopt IFRS

There is significantly more note disclosure required under IFRS in almost every area including accounting policies

Crash Course in IFRS - TermsIFRS – International Financial Reporting

Standards (issued post April 2001)IAS – International Accounting Standards (issued

pre April 2001)IASB – International Accounting Standards

BoardIFRIC – International Financial Reporting

Interpretations CommitteeSIC – Standing Interpretations Committee

Crash Course in IFRS Cont’dWhen transitioning to IFRS most standards and

policies will need to be applied retrospectivelyOptional exemptions to retrospective application:

Business combinationsEmployee benefitsLeasesBorrowing costs, etc.

Mandatory exemptions to retrospective application: Derecognition of financial assets and financial liabilities Hedge accounting Non-controlling interests, and Estimates

IFRS and Presentation ItemsIFRS permits departures from standards if they

would make the F/S misleadingIFRS does not allow comparative information to

be omitted in the rare circumstances when it is not meaningful

When applying an accounting policy retrospectively, IFRS requires a financial position for the earliest comparative period possible

IFRS and Presentation Items Cont’dComplete set of F/S under IFRS include:

A statement of financial position A statement of comprehensive income A statement of change in equity A statement of cash flows Note disclosure

An entity may choose different titles for these statements

IFRS and Presentation Items – Cont’dThe I/S section under IFRS is less specific as to

the items that need to be shown on the I/SIFRS (IAS 1) does not allow for disclosure on

“extraordinary items”Disclosure of authorization for issue – an entity is

to disclose the date the F/S were authorized and by whom

Current assets and current liabilities must be in order of liquidity (IAS 1)

Concept of OCI (Other Comprehensive Income)

Property, Plant and Equipment (PPE)Relevant sections IAS 16 and ASPE 3061 IFRS deals with the following outside the scope of IAS 16

Investment Property - IAS 40 and Biological assets (Agriculture) - IAS 41

PPE (def’n) – are tangible items that

(a) Are held for use in production or supply of goods or services, for rental to others, or for administrative purposes; and

(b) Are expected to be used for more than one period

Cost comprises:

(c) Purchase price, including import duties, non-refundable taxes, less discounts

(d) Amounts for bringing the asset to the location and making it operational

(e) The initial estimate of dismantling and removing an item and restoring the site.

PPE Cont’dMeasurement subsequent to initial recognition: -

There are 2 options:(a) Cost Model – PPE shall be carried at its costs

less any accumulated depreciation and accumulated impairment losses

(b) Revaluation Model – PPE whose FV can be reliably measured shall be carried at fair value (on the date of revaluation) less any subsequent accumulated depreciation and accumulated impairment losses. Revaluations should be done regularly

PPE - Cont’dThe method chosen must be applied to an entire

class of asset

 If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognized in OCI and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in P&L to the extent that it reverses a revaluation decrease of the same asset previously recognized in P&L.      

PPE – Amortization vs. DepreciationASPE and IFRS– amortization method chosen

has to be rational and systematic

IFRS – Includes above, however, there is a direct relationship between the depreciation method chosen and the pattern or expectation that the future economic benefits are to be consumed by a company over the life of the PPE

PPE – Amortization Cont’d

Amortization vs. DepreciationASPE IFRS

Amortization charged is the greater of:-The cost less salvage value (estimated net realizable value at the end of its life) over the estimated life- The cost less residual value over the useful life of the asset.

Depreciation charged is:- The cost less residual value over the useful life of the asset

Estimates on the useful life, method of amortization are reviewed periodically and residual value only when an event occurs

Estimates of useful life, method of depreciation and residual values are reviewed at each reporting date (at least) or when expectations deviated from previous estimates

PPE – Component accountingComponent accounting exists under ASPE and

IFRSExample of component accounting:

A ship and that is separate into the following with the following estimated useful lives:

The body of the ship – 30 yearsEngine – 15 yearsFurniture and fixtures on the ship – 10 years

PPE – Disclosure

For each Class of PPE the following should be disclosed:the measurement basisthe depreciation methodsthe useful life or depreciation ratesgross carrying amt and accumulated

depreciation

A reconciliation of the carrying amt at the beginning and end of the period showing:additionsassets classified as held for sale or included in

disposal group classified as held for saleacquisition through business combinationsincreases /decreases resulting from revaluations and

from impairment lossesimpairment losses recognized in P&Limpairment losses reversed in P&Ldepreciationnet exchange difference arising on translation of F/Sother changes

PPE – Disclosure Cont’d

PPE – Disclosure Cont’dAdditional disclosure:

the existence and amounts of restrictions on title and PPE pledged as security

the amount of expenditures recognized in the carrying amount of an item of PPE in the course of its construction

the amount of contractual commitments related to PPE

 if not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for items of PPE that were impaired, lost or given up that is included in profit or loss

PPE – Disclosure Cont’d If items of property, plant and equipment are

revalued, the following disclosure is needed: the effective date of the revaluationwhether an independent valuer was usedthe methods and significant assumptions in estimating

the FVthe extent to which the FV was determined directly by

reference to observable prices in an active marketthe carrying amount that would have been recognized

had the assets been carried under the cost modelthe revaluation surplus, indicating the change for the year

and any restrictions on distributions to shareholders

PPE – Final ThoughtsTopics related to PPE not covered include asset

retirement obligations, PPE impairments and non-monetary transactions involving PPE

ASPE 3063 and IAS 36 – Impairment of Long-lived Assets

LeasesIAS 17 and ASPE 3065

IAS 17 – apply to all leases except equipment used to explore for or use minerals, oil, natural gas and non-regenerative resources and certain licensing agreements

Both IFRS and ASPE consider whether the benefits and risks of ownership have transferred when classifying leases.

New definitions and terminology under IFRS FINANCE LEASE – a lease that transfers substantially all the

risks and rewards of ownership. Title transfer is not mandatory.

Leases Cont’dUnder IFRS leases have to be classified as either an

operating lease or a finance leaseGuidance to determine if the risks and benefits of an

asset have been transferred is provided including:Ownership transfer by the end of the leaseThe lessee has an option to purchase the asset for a price

below FVThe term of the lease is for the majority of the life of the

assetAt inception, the PV of the minimum lease pymts equals

substantially all of the FV The asset is of such a specialized nature

Leases Cont’dLease classifications can only be changed if the

provisions of the lease have been changedChanges in estimates related to economic life,

residual value , etc do not give rise to a new lease classification

Under IFRS there is no specific guidance on how to account for the implications when lease terms are modified

There are specific standards for land and building leases – IAS 17 – 15A - 19

Capital/Finance Leases – Recording by Lessee

The basic process of recording a capital /finance lease is consistent under ASPE and IFRS

An asset and obligation is recorded and

represents the lower of the PV of the minimum lease pymts or the FV of the asset

The asset is then amortized into operations similar to other assets in the same class and the obligation is reduced by payments

Capital/Finance Leases – Recording by Lessee Continues

ASPE IFRSDiscount rate:The discount rate equals the lower of:-lessee’s rate for incremental borrowing and-Implicit interest rate

Discount rate:A Company is REQUIRED to use the implicit rate if it is practical to do so. If it is not practical a company can use incremental borrowing rate.

Amortization period of asset:If there are no terms that make reference to legal ownership passing or no BPO then the asset is amortized over the lease term instead of the expected life of the asset

Amortization period of asset:If the legal title is not expected to transfer, then the asset is amortized over the shorter of the lease term or the useful life of the asset.

Direct initial costs:Not specifically addressed.

Direct initial costs:Costs incurrent on initial set-up are capitalized as part of the asset.

Leases – Finance Lease Disclosure (Lessee)For each class of asset, the net carrying amount at year-endA reconciliation between the total of future minimum lease payments

at year-end, and their present value (PV) for each of the following periods: 1 year; 1 to 5 years; and later than 5 yearscontingent rents recognized as an expense in the period.the total of future minimum sublease payments expected to be

received under non-cancellable subleases at the end of the reporting period

a general description of the lessee's material leasing arrangements including, but not limited to, the following: the basis on which contingent rent payable is determined; the existence and terms of renewals or purchase options,

escalation clauses; andrestrictions imposed by lease arrangements, such as dividends,

additional debt and leases

Leases – Final ThoughtsImpairment – IAS 36 deals with impairment of

lease assetsFirst time adoption issues are covered in IFRIC 4

and IFRS 1There is an optional exemption to retrospective

application for leasesTransition date – a lessee or lessor determines the

classification of a lease

SO.....QUESTIONS?Anyone?

COFFEE TIME!

AND WE’RE BACK!

Related party transactionsASPE 3840 and IAS 24Identification of related parties is the same,

except that IFRS specifically identifies post-employment benefit plans as related

Measurement – IFRS provides no specific guidance on measurement whereas ASPE has a decision tree for carrying vs. exchange amounts

Disclosure – IFRS requires disclosure of all related parties irrespective of transactions or balances

Related Party Transactions – IFRS Disclosure

Transactions require separate disclosures by category:The parent;Entities with joint control/significant influence;Subsidiaries;Associates;Joint ventures;Key management personnel of the entity or its

parent and;Other related parties

Related Party Disclosures - IFRSSimilar to ASPE with a description of the nature of the

transaction, amounts, terms of repayment etc.Additional disclosures are required for the following:

Key management personnel compensation Provision for doubtful debts related to outstanding balances with

related parties Expense recognised during the period in respect of bad or doubtful

debts due from related partiesIFRS does provide some exemptions regarding government

controlAdditional disclosure requirements in:

IFRIC 17 – Distribution of Non-Cash Assets to Owners IAS 27 – Consolidated financial statements IAS 28 – Investments in Associates; and IAS 31 – Interest in Joint Ventures

ASPE

Includes all taxesIncluding refundable,

AMT and rate regulated

Probable is defined as greater than 50%

Classification – current and non-current for future taxes

Includes all taxesNo specific guidance

for refundable, AMT or rate regulated

Must record if probable (no specific definition indicated)

Classification – non-current for all deferred taxes

Income Taxes – Some Differences

IFRS

ASPE

Choice of:taxes payable method;

orFuture income taxes

method

Must record both:Current taxes - asset

or liability; andDeferred taxes as

non-current assets or liabilities

Income Taxes - Methods

IFRS

Income Taxes – MethodsThe taxes payable method is a method of accounting

under which an enterprise reports as an expense (income) of the period only the cost (benefit) of current income taxes for that period, determined in accordance with the rules established by taxation authorities

The future income taxes method is a method of accounting under which an enterprise reports as an expense (income) of the period the cost (benefit) of current income taxes and the cost (benefit) of future income taxes, determined in accordance with the rules established by taxation authorities

Income Taxes - DefinitionsTemporary differences are differences between the

tax basis of an asset or liability and its carrying amount in the balance sheet. Temporary differences may be either:(i)     Deductible temporary differences, which are

temporary differences that will result in deductible amounts in determining taxable income of future periods when the carrying amount of the asset or liability is recovered or settled; or

(ii)     Taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable income of future periods when the carrying amount of the asset or liability is recovered or settled

Taxes Payable

Current income tax exp (benefit)

ReconciliationAmount and timing of

capital gains reserves or similar reserves for 5 years

Unused income tax losses CF and unused credits

Portion of income tax related to transactions charged or credited to equity

Current income tax exp (benefit)

Future income tax exp (benefit)

Amount and timing of capital gains reserves or similar reserves for 5 years

Unused income tax losses CF and unused credits

Portion of income tax related to transactions charged or credited to equity

Income Taxes – Disclosures - ASPE

Future Taxes

Income Taxes – Disclosures - IFRSDisclose separately the major components of tax

expense(income) included in the determination of the profit(loss) for the period, including:Current tax expense(income);Adjustments recognized in the year for current tax of prior

periods;Amount of deferred tax expense(income) relating to

changes in tax rates or the imposition of new taxes;Amount of benefit arising from previously unrecognized tax

loss, tax credit or temp difference of a prior period that is used to reduce current tax expense;

Likewise for deferred tax expense;Deferred tax expense arising from the write-down or

reversal of a previous write-down of a deferred tax asset

Financial InstrumentsASPE 3856 and IFRS 7, IAS 32 and IAS 39Differences exist for:

Scope – IFRS includes many items outside of the scope for ASPE such as investment companies, certain types of contracts, and certain types of derivatives and insurance contracts

Classification – IFRS requires classification into loans and receivables, held-to-maturity, fair value through profit or available –for-sale, financial liabilities measured at amortized cost

Classification & presentation– equity vs. liabilityMeasurement – fair value, F/X, impairments

Financial Instruments - Classifications Taken directly from IAS 39 paragraph 9

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market

Held-to-maturity investments (HTM) are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity

Available-for-sale (AFS) financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

Fair value through profit or loss is a financial asset (liability) that would otherwise be classified as AFS except that they are derivatives.

EXAMPLESWho’s on first? What’s on second? Where did third

go?

Transition ImplicationsImpact on the bottom line

Subsequent impact on performance compensation, ratios and bank covenants, investor relations, dividend distributions

Potential for increased volatility of reported results (fair value accounting)

Volume and complexity of financial disclosures (ASPE vs. IFRS)

Transparency and comparability to other entitiesCompetitors, suppliers, customers etc.

ASPE

Identify, Analyze, Determine, Implement

Create opening balance sheet (retrospective treatment)Recognize assets &

liabilities required under ASPE

Re-measure and reclassify according to ASPE (as necessary)

Identify, Analyze, Determine, Implement

Create opening balance sheet (retrospective treatment)Recognize assets & liabilities

required under IFRSRemove those balances not

complying with IFRSRe-measure and reclassify

according to IFRS (as necessary)

Transition Steps

IFRS

The Right Option for Your Company: ASPE vs. IFRS

Most private entities are expected to transition from current generally accepted accounting standards (GAAP) to ASPE

Facts to considerCurrent operations (your target markets);Future plans (IPO); and Users of the financial statements (investors, lenders,

etc).

ARE WE THERE YET?www.adamsmiles.comLeanne Mongiat – lmongiat@adamsmiles.comTrudy Snooks – tsnooks@adamsmiles.com